Q: What would be a few other regions in the Asia-Pacific that are most attractive to you right now and comprise a decent chunk of the FAX portfolio?
A: We favor local currency bonds in Indonesia, Korea, Malaysia, Thailand and the Philippines. Domestic demand, complemented by government investment programs, provides some buffer against global headwinds. We’ve also been encouraged by other positive developments.
Foreign direct investment in Indonesia has continued to grow, up 30% in the second quarter, reflecting its attractiveness to overseas companies. Korea is one of the more liquid and more developed bond markets in Asia, underpinned by fiscal stability. Malaysia, meanwhile, is boosting investments and giving a new lease of life to its capital markets by liberalizing rules, while the Thai economy is recovering much faster than expected from last year’s devastating floods. The Philippines’ efforts to battle corruption and improve efficiency have been rewarded with a series of credit rating upgrades, with investment-grade status likely in the not-so-distant future.
Q: Sovereign debt is a huge deal in the Western world right now. Has that caused any trouble for sovereign debt issues in the Asia-Pacific — either in the big players like China or the smaller ones like Malaysia?
A: Western governments have chronically high levels of outstanding public debt, whereas most of their Asian counterparts are fundamentally robust, having learned their lessons from the 1997-1998 financial crisis. Fiscal woes in Europe and the U.S. have had two main effects on financial markets so far this year: first, a broad swing from riskier assets such as commodities and equities into safe havens like bonds; and second, an influx of capital into Asian sovereign bonds, given their appeal both in terms of yield and the fiscal strength of Asian governments vis-à-vis the West.
Notably, funds focused on Asian emerging-market bonds attracted $14.4 billion in the first quarter of 2012, compared with $1.9 billion in the same period a year ago, according to U.S. research company EPFR Global.
Q: If the last few years have taught us anything, it’s how connected the global economy really is. So give me a global economic forecast for the next 12 to 18 months: Better times ahead in 2013, or worse times ahead?
A: It is difficult to see any sustained global recovery in the near term. There is no easy fix to Europe’s debt crisis, which remains the biggest risk. Bond yields are reflecting deep concerns over a eurozone exit for Greece and a bailout for Spain. Elsewhere, a moribund labor market has hindered consumer spending in the US. Even resilient Asia is starting to falter.
With these overhanging risks, sentiment could deteriorate in the months ahead if growth data and/or policy actions further disappoint.
Q: The BRICs were all the rage a few years ago, but now all of these emerging markets have their own troubles. Broadly speaking, why should investors still believe in the idea of investing in emerging markets right now?
A: Growth in emerging economies has slowed in tandem with a deteriorating global outlook. Nonetheless, it is still the world’s fastest-growing region, with the IMF forecasting 5.6% growth this year, compared to only 1.4% for advanced economies. While external headwinds, such as the European crisis and the anemic U.S. recovery pose significant risks, the underpinnings of economic growth in emerging markets are still solid.
Private-sector credit growth remains robust in emerging markets, in contrast to developed economies. Fiscal and public debt positions, likewise, are much healthier compared to the West. Emerging market companies are more profitable and have sturdier balance sheets than their developed market counterparts. In the long run, demographics also favor emerging economies — in particular the rise of a burgeoning affluent middle class.
Q: Anything else you’d like to add that we haven’t covered?
A: Our investing approach centers on three key tenets to generate our returns. First, we are long-term fundamental investors, not short-term traders. So we focus on economic fundamentals over the longer term and ignore short-term market noise. Second, we believe in diversification as a key way of generating superior risk-adjusted returns. And finally, we believe that risk management is core to our approach to managing bond funds.
For more on the Aberdeen Asia-Pacific Income Fund, visit www.aberdeenfax.com/.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing he did not own a position in any of the stocks named here.